Hematopoiesis and vasculogenesis in the yolk sac of the mammalian embryo are processes that begin during gastrulation and first require the induction of mesoderm. The first blood and vascular endothelial cells form when the extraembryonic mesoderm is induced to differentiate. However, little is known about the molecules involved in these processes during embryonic development. To examine the possibility that epithelial- mesenchymal interactions play an important role in yolk sac hematopoiesis and vasculogenesis in the mouse, we devised a novel transgenic embryo explant culture system. Transgenic embryos harvested prior to the formation of blood are stripped of their surrounding primitive endoderm (epithelium) and grown in collagen drop cultures alone or together with the isolated endoderm tissue. Using this system we have demonstrated that primitive (visceral) endoderm signaling is essential for activation of primitive hematopoiesis and embryonic vasculogenesis. These signals are short-range and diffusible and stage-dependent, becoming less potent around late gastrulation and eventually undetectable. Remarkably, primitive endoderm signaling can respecify hematopoiesis and vasculogenesis in tissue that is not fated to form blood or vascular cells, essentially repolarizing the A-P axis. The goal of this proposal is to elucidate the sources and molecular consequences of endodermal signaling and to identify some of the molecules involved in these critical developmental processes. In the first aim of the proposal, we will ask whether respecification of anterior ectoderm (fated to form neurectoderm) involves the induction of mesoderm first and activation of hematopoiesis and vasculogenesis second. We will determine how late in development repolarization of anterior ectoderm by primitive endoderm signals can still be achieved and how general is the ability of non-hematopoietic tissue to respond to primitive endoderm signaling. In the second aim of the proposal we will use the explant culture assay to begin to identify endodermal signaling molecules involved in induction of hematopoiesis and vascular growth. Finally, we will focus on hematopoietic development in explants by asking whether stem/progenitor cells are targets of endodermal signaling and whether definitive hematopoietic cells form in these cultures. These studies may have important implications not only for our understanding of normal development but may provide insights into mechanisms underlying human diseases originating at the level of stem/progenitor cells. They may also suggest new and more effective stem cell-based therapeutic approaches for hematopoietic and vascular diseases.